essay sample on "Accounting report"

This paper aims to calculate ratios, conduct comparative analysis of financial statements of three companies belonging to the same industry. The industry chosen is the telecommunications industry and the companies chosen are Nokia Corporation, Ericsson and Motorola. The selected ratios include those of profitability, efficiency and leverage for the purpose of analyzing company performance and for explaining the importance of accounting information.

The following summary of ratios is need to evaluate the company’s profitability, liquidity and solvency[2]:

31-Dec-06

31-Dec-05

31-Dec-04

Gross Margin

0.33

0.35

0.38

Net Profit Margin

0.10

0.10

0.11

Return on Assets

0.19

0.16

0.15

Quick ratio

1.68

1.79

2.28

Current Ratio

1.83

1.96

2.45

Total Assets Turnover

1.92

1.40

1.27

Debt to Equity ratio

0.88

0.79

0.58

The company’s profitability[3] may be measured using gross margin, net profit margin and return on assets. All these profitability ratios are very good for the company. Although Nokia’s gross margin decreased from 0.38 in 2004 to 0.35 and to 0.33 in 2006, the said ratios are still high since in practical terms the company could be earning one third from on the average from the product or services it sells its consumers.

Net profit throughout the three years period did not fall below 10% hence the company is really profitable. As distinguished from gross profit margin, net profit margin the further deduction of operating expenses to arrive at net profit and divide the same by the total revenues.

The company’s quick assets ratios[4] for the last three years showed a declining trend from 2.28 in 2004 to 1.79 in 2005 and 1.68 in 2006. The said ratios are still considered very which means that company could readily meet its current maturing obligations as the company is highly liquid. Since the company’s current ratios at 1.85, 1.70 and 2.7o for the years 2006, 2005 and 2004 respectively, are not too far from its quick asset ratios, it may be deduce that the bulk of the company’s current assets are receivables, short terms investments and cash and cash equivalents. It total asset turnover is also very good as increasing trend is observed for the three year period.

Debt equity ratios of the company are also very although there was a slight deterioration from 0.58in 2004 to 0.79 in 2005 and then 0.88 in 2006. Since the said ratios are below one, it may be inferred that the company has stable financial condition.

LM Ericsson Telephone Company[5]

The following summary of ratios is need to evaluate the company’s profitability, liquidity and solvency:

31-Dec-06

31-Dec-05

31-Dec-04

Gross Margin

0.41

0.46

0.46

Net Profit margin

0.15

0.16

0.11

Return on Assets

0.12

0.12

0.07

Total Assets Turnover

0.90

0.69

0.68

Quick ratio

0.21

0.23

0.17

Current Ratio

1.85

1.70

2.70

Total Assets Turnover

0.90

0.69

0.68

Debt to Equity ratio

0.78

1.00

1.29

Gross margin at 0.46 in 2004 was maintained in 2005 and declined slightly in 2006 to 0.41. Net profit margin on the other hand improved from 2004 at 0.11 to 0.16 in 2005 compared with the maintained level of gross margin for the same years. The said net profit margin however behaved similarly by decreasing in 2006 to 0.15 from 2005. This means the operating expenses are lower in relation to revenues in 2005 as compared with 2004.

The company’s quick asset ratios poor since there are below 1.0 while the current ratios are very good since they are above 1.0 for the three year period under review. Although current ratio declined from 2.70 in 2004 to 1.70 in 2005 and improved a little in 2006 at 1.85, the said liquidity level is still quite high as the company could match its currently maturing obligations. Its total asset turnover is not good although it had shown an increasing trend for the three year period.

Motorola[6]

The following summary of ratios is need to evaluate the company’s profitability, liquidity and solvency:

31-Dec-06

31-Dec-05

31-Dec-04

Gross Margin

0.30

0.32

0.34

Net Profit Margin

0.09

0.12

0.05

Return on Assets

0.09

0.13

0.05

Quick ratio

1.80

2.03

1.75

Current Ratio

2.01

2.23

1.99

Total Assets Turnover

1.16

1.11

1.01

Debt to Equity ratio

1.25

1.14

1.32

Gross margins were maintained for not less than 0.30 for the last three years under review although a declining trend was evident. Net profit margin improved from .05 in 2006 to 0.12 in 2005 and declined slightly in 2006 at 0.09. Said ratio is still satisfactory from the management point of view specially in the light of the almost similar behavior of the closely related return.

Motorola liquidity is also very good as evidenced by its very high quick assets ratio of not less than 1.75 for the three year period under review. This is further confirmed by its current ratios of almost 2.00 and above for the three year period. The same is further supported by an improving total asset turn over which started increasing from 1.01 in 2004 to 1.11 to 2005 and further improved to 1.16 in 2006. Higher asset turnover means the company was able to use more its assets in producing revenues for the given years.

Solvency ratios are within the satisfactory level as 2006 is better for the two preceding years after a light improvement from 2004 to 2005.

(c) Conduct Inter-company Analysis

The following summary of ratios is need to evaluate the comparative profitability, liquidity and solvency of three companies:

Comparative ratios

Nokia

Ericsson

Motorola

Average

Gross Margin

0.33

0.41

0.30

0.34

Net Profit Margin

0.10

0.15

0.09

0.11

Return on Assets

0.19

0.12

0.09

0.13

Quick ratio

1.68

0.21

1.80

1.23

Current Ratio

1.83

1.85

2.01

1.90

Total Assets Turnover

1.92

0.90

1.16

1.32

Debt to Equity ratio

0.88

0.78

1.25

0.97

On the overall the all of the three companies are profitable one is the better than the other. They also liquid in terms of their current ratios which are above 1.0 although Ericsson has a very poor acid test ratio for 2006. Their debt to equity ratios are almost within the industry average. Every company may be recommended to investors as every company exhibits good signs but in respect of a particular aspect and in case one is force it choose the best among the three each has its own peculiarity.

In terms net profit margin which Ericsson is the best among the three but in terms of return on assets, Nokia is the most profitable among the three. The said ratio is confirmed by the total assets turnover where Nokia exhibited the highest and the only one above the industry averages using two ratios.

In terms of liquidity, however, it is Motorola which is the best among the three which is closely followed by Nokia

In terms of solvency ratios, Ericsson is the best and followed by Nokia

Conclusion and Recommendation

This paper was able to demonstrate the calculation of financial ratios as bases for conducting comparative analysis of financial statements of three companies belonging to the same industry. This paper found out the three companies namely Nokia Corporation, Ericsson and Motorola belong to the same industry. They exhibited positive of profitability, efficiency and leverage for the purpose of investment by investors and for purposes of extending credits by investors although one is better than the other. The decision maker must therefore be guided properly in the differences among the three as noted.

Appendices:

Copies of the financial statements from which the ratios were calculated, See Excel file